Blog Post

Risky Business: An Interview with ECG’s Valuation Practice Leader, Adam Klein

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Can you please tell us about how you got into healthcare valuation.

I think valuation chose me more than I chose it. I spent the first three to four years [of my career] doing all sorts of strategy and compliance work and operational consulting and eventually settled on valuation because it was a good match with the technical training I’d received and aligned with my interests. I’ve been doing it for 18 years or so.

How have the recent changes in the Stark law and the Anti-Kickback Statute impacted the management of risk for organizations?

One way is clarification in the proposed regulations on some things that have created confusion in the past. For example, the recent case against UPMC centered on allegations that a productivity-based compensation model was a violation of Stark because it correlates with referrals. Even though the work of a user only associated with personally performed non-DHS services, there tends to be a one-to-one or high correlation. Previously, any positive correlation between how an organization pays a physician and how a patient is referred would be a problem, but the proposed regulations now state that is not the case.

Another thing they cleared up relates to commercial reasonableness. There were a couple of cases where allegations of non–commercial reasonableness were buttressed by claims of financial losses in the organization. If hiring physicians generates a net economic loss, it must be the referrals. Now, they have clarified that this isn’t necessarily a demonstration of non–commercially reasonable transactions or intent to get referrals. Everybody knew that was common sense, but it was a minefield of risk that we all had to live with and think about. The clarification allows us to accept that net financial loss is probably relevant in a lot of circumstances, but, by itself, it is not sufficient to demonstrate intent to induce referrals.

The last thing that does need to be clarified when the proposed regulations are finalized is how to deal with population risk. When capitation comes into play, a lot of traditional ways of thinking about fair market value (FMV) and physician compensation go out the window. There needs to be some flexibility to be innovative and think of ways to incentivize physicians to do the right thing for their patients. The way the current regulations are written makes that a very risky and challenging endeavor, and that’s a barrier that CMS recognizes. I think the initial proposal is still a bit narrow, but it gives us a place to start.

What are the main factors that influence risk in a compensation model?

The unfortunate truth is that factors that cause risk for compensation plans in organizations are the things that are rarely paid attention to. There’s a commonly held myth that if you can prove FMV, you don’t have any risk. And unfortunately, that’s not true. If you look at the growing number of whistleblower allegations, the common theme in most of them is that there were, first, bad facts, and then there was a bad valuation.

Bad facts are generally driven by behaviors, emails that people write, the way they make decisions, the lack of objectivity, and a host of other factors that are much more abstract and harder to manage. And the compensation paid, which they think is FMV, can ultimately prove to be something outside of FMV.

Earlier you mentioned fair market valuations are used to assess risk. Is there a benchmark percentile that you would suggest to an organization as reasonable, and is there any variability due to the productivity level of providers?

Something that is commonly misunderstood and misapplied is the notion that a single percentile is the sole and determinative factor of FMV. The problem with this assumption is that healthcare organizations are conflating two things: enforcement risk and FMV. The truth is that compensation and productivity do align when you look at large groups of physicians. But any individual physician is unlikely to have tight alignment between compensation and productivity.

ECG has record-level detail from over 20 years in our compensation and productivity surveys, and we know that, if we look at a physician’s compensation or productivity and assign percentiles to each one, they tend to be divergent. In fact, using productivity percentiles to predict compensation is poor methodology. I’d be more accurate if I just closed my eyes, ignored productivity, and guessed median every time.

Based on how an organization wants to compensate a provider, are there different policies or processes they would need to help mitigate risk?

If you ask most compensation administrators, “What is your risk with physician FMV?” they’d likely say, “We got fair market valuations on each doctor, and we’re good. We don’t have risks.” It’s impossible to avoid risk entirely; you can only try to minimize it.

One of the ways that you minimize risk is by deciding where you want to invest the most resources. I wouldn’t spend as much time scrutinizing my physicians who are paid median, because the fact is there’s less enforcement risk. That doesn’t necessarily mean that median compensation is FMV in each and every case. In fact, in some instances where the government has intervened, rates at or less than the median have been deemed to not be commercially reasonable.

The percentile is useful but not foolproof. What a lot of organizations do, and it’s prudent, is differentiate what their approval thresholds are and what the review protocols are based on how highly the physicians are paid. There may be other facts that you want to introduce in terms of how much scrutiny goes into those arrangements. Typically, we see that total cash compensation percentiles are used to differentiate levels of review and scrutiny so that organizations are managing risk based on where they see the highest likelihood of enforcement.

Do you have any suggestions for what process an organization could focus on to continue monitoring risk even after a compensation plan is in place or after a fair market valuation?

There are a few things that I think are very important. The first one is to avoid a process which focuses only on retrospective reviews. Some organizations will ask the question, “Did we pay too much last year?” The problem with this is that there’s a lot of incentive to say, “Of course not.” You really can’t be objective because the cat’s already out of the bag and, if you find it, then, what do you do about it? In addition, a retrospective approach is a little bit incomplete, because it doesn’t adequately tell you about what’s going to happen in the next year. You’re not really getting in front of the problem.

The better process is to just understand that FMV is a continuum. There are not a lot of circumstances where you are above FMV. Understanding the risk and managing it is what’s critical, and that happens by looking forward and asking: What arrangements am I about to enter into? What controls do I have in place about how am I managing the physician compensation arrangements? The best things to do are continue to make objective decisions and apply consistent frameworks to evaluate arrangements; don’t look for special deals for doctors who generate the most referrals.

It’s really about understanding what amounts a physician could be paid under the formula to make sure that you can identify risk and put controls in place up front as you approach them, and it’s about acting in a more proactive way.

Is there anything else you’d like to mention about risk or compliance for compensation plans that we haven’t talked about yet?

There are a couple of things that people should keep on their radar. The first one is the impact of NPs, PAs, or other advanced practice clinicians. They are often in a role that allows the physicians to generate a lot more RVUs than they would’ve been able to otherwise. This can cause tremendous skewing and, I think, can bring tremendous risk of enforcement. The example would be an organization where there are a lot of APPs who are unproductive if you look at their personally performed productivity. The physicians who are supervising them are benefiting from being able to do a lot more in each day. It’s important to notice this and make sure that the physician compensation considers the effort of the APP.

But even more so, there are coding and compliance risks here because physicians tend to follow the incentives. It is extremely complex and difficult to ensure that, when APPs are involved with part of the care, work RVU attribution really is being done in a way that represents the intent and rules of the coding and documentation guidelines. The challenges and opportunities of having APPs need to be balanced.

The other thing I think people should bear in mind is enterprise risk management, or the amount of variance. Ultimately, FMV is just a question of, “How much variability are we going to tolerate?” If I think FMV is X, that’s the point I’m going to say, “You need to be within some amount of X.”